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B400 Once Again Poised to Top S&P 500 in Earnings, Revenue Growth

John A. PrestboJohn A. Prestbo

Earnings-reporting season has begun for the fourth quarter of 2016. Investors are excited that profit and revenue growth is being forecast for the S&P 500. But their glee would be better focused on the companies in the Barron’s 400 Index. These financially sound worthies are predicted to once again out-grow their S&P 500 brethren—though by slightly narrower margins than in last year’s preceding quarters. That’s because analysts foresee the S&P 500 doing better, not the Barron’s 400 doing worse.

Overall, analysts are forecasting that two-thirds of both indexes’ components will report higher earnings per share than a year earlier. But top-line revenue growth is predicted for 79% of Barron’s 400 companies versus 69% of those in the S&P 500. The following table capsulizes security analysts’ outlooks:

Median 4Q 2016 Estimate vs. Median 4Q 2015 Actual
EPS Revenue
Barron’s 400 7.14% 6.41%
S&P 500 6.69% 3.30%

Six months ago, analysts estimated the S&P 500 would increase per-share earnings by more than the Barron’s 400. Then came the usual backtracking, and analysts cut their expectations more for the S&P 500 than the Barron’s 400. Indeed, with respect to revenue, they raised their prediction for Barron’s 400 companies:

Median Estimates Over Past Six Months
EPS Revenue
Barron’s 400 -4.50% 0.61%
S&P 500 -5.52% -0.26%

Of course, there always is the chance that analysts have been too cautious. Ten component companies of the Barron’s 400 already have reported first quarter results because they are on non-standard fiscal years. Their median year-over-year increase for per-share earnings is 9.7% and for revenue is 6.2%. For 19 S&P 500 companies in the same position, the median increase in per-share earnings is 9.6% and in revenue 4.9%.

As usual, sector estimates vary widely. And this time the sector forecasts favor the S&P 500.

Median 4Q 2016 Estimate vs. Median 4Q 2015 Actual
Earnings per Share Revenue
Barron’s 400 S&P 500 Barron’s 400 S&P 500
Consumer Discretionary 8.93% 8.14% 8.73% 3.66%
Consumer Staples 3.99% 6.02% 2.78% 1.63%
Energy 8.56% 14.67% 9.95% 8.64%
Financials 8.94% 5.59% 5.27% 0.93%
Health Care 5.70% 7.64% 7.43% 4.33%
Industrials 1.96% 0.83% 4.10% 2.14%
Materials -4.65% 4.96% 3.12% 1.89%
Technology 10.15% 11.11% 7.54% 6.53%
Telecommunications -40.21% -29.85% 8.90% 0.08%
Utilities 3.40% 9.47% -3.53% 17.42%

S&P 500 companies have the better per-share earnings predictions in seven of 10 sectors: consumer staples, energy, health care, materials, technology, telecommunications and utilities. Some of the S&P 500’s superior expectations come from very large per-share earnings gains forecast for companies that aren’t in the Barron’s 400. Among them are Archer-Daniels-Midland Co., Kraft Heinz Co. and Molson Coors Brewing Co. (in consumer staples), and Apache Corp. (in energy).

But that same factor works against the S&P 500 in consumer discretionary, financials and industrials. Big predicted earnings gains for Gray Television Inc. and Nutrisystem Inc. (consumer discretionary), Apollo Global Management, LLC
(financials) and ILG Inc. (industrials) boost the Barron’s 400 but aren’t part of the S&P 500.

Revenue expectations favor the Barron’s 400 in all sectors except utilities. The utilities sector is minor in the Barron’s 400, which has just two compared to 28 in the S&P 500.

Stock size offers the more revealing distinction of expectations between the two indexes, though the two share just the mega- and large-capitalization segments.

Median 4Q 2016 Estimate vs. Median 4Q 2015 Actual
Earnings per Share Revenue
Barron’s 400 S&P 500 Barron’s 400 S&P 500
Mega Cap (>$10 billion) 7.23% 7.07% 5.94% 3.66%
Large Cap ($3 bln-$10 bln) 9.38% 3.29% 6.44% 2.26%
Mid Cap ($1 bln-$3 bln) 6.03% N.A. 6.85% N.A.
Small Cap ($500m-$1 bln) -1.86% N.A. 10.15% N.A.
Micro Cap (< $500 mln) 2.03% N.A. 5.45% N.A.

Barron’s 400 companies prevail in both segments they have in common. The S&P 500 comes close to matching per-share earnings predictions in mega caps, but lags considerably in large caps. Revenue-growth forecasts tilt unequivocally toward the Barron’s 400 companies.

Interestingly, mega caps are the forecasted leading segment in earnings growth for the S&P500, while large caps are for the Barron’s 400—displacing mid-caps, which were in the forefront for much of last year. On the other hand, mid-caps outshine the two larger size segments in expected revenue growth but fall far short of the predicted gain for small caps. The small companies apparently weren’t able to profit from that top-line upsurge, which nonetheless heralds the return of investor interest in this size segment. And it’s the first quarter in a while that micro caps show no anticipated decreases in either earnings or revenue.

This improved outlook for mid-sized, small and micro stocks benefits the Barron’s 400 in two ways. Not only does the S&P 500 not have any such stocks but also the Barron’s 400 is equally weighted. That means the smaller stocks seem poised to contribute more to the Barron’s 400 performance this year than last.

Forecasts are often faulty, so only time will tell how the final quarter of 2016 actually turned out. However, indications at this point are that the Barron’s 400 companies will post substantially better earnings and revenue growth than the broader market of listed companies.

John Prestbo, senior advisor to MarketGrader Capital, was formerly editor and executive director of Dow Jones Indexes. He was also chairman of the Dow Jones Index Oversight Committee. During his time at Dow Jones Indexes he worked, along with Barron's and MarketGrader, on the development of the Barron's 400 Index. Prior to that, Mr. Prestbo worked as an editor and writer for The Wall Street Journal in various capacities, including page-one editor, commodity news editor and markets editor. Mr. Prestbo has co-authored or edited several books over the past 30 years. The most recent was "The Market's Measure: An Illustrated History of America Told Through the Dow Jones Industrial Average," published by Dow Jones Indexes in 1999 and "Barron's Guide to Making Investment Decisions" which he helped to compile and edit in 2006. Mr. Prestbo won the University of Missouri Award for Distinguished Business Writing in 1967 and the George M. Loeb Achievement Award for Business Writing in 1968. In 2007, he won the William F. Sharpe Indexing Lifetime Achievement Award. That same year, he was honored for his leadership by Dow Jones Indexes during its celebration of 10 years as a separate business unit.

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